Market Insight: Risk Settlement at maximum capacity?

Impact of higher deal volumes on market access and Insurer pricing

The Risk Settlement market is busy. Capital is not the constraint, resource is. This statement is undoubtedly true… but this has been a theme for the last fifteen years, so what’s changed and will this impact Insurer pricing?

Total £ volumes up, driven by deal size

Larger, rather than more deals have driven the trend for increasing volumes. This will continue as good management (and some good luck) has brought Risk Settlement into focus for many of the largest Schemes.

This does not mean the end of the road for smaller schemes, but awareness of your ‘buy-out readiness’ is critical before approaching the market to get the best engagement and a great result.

Demand and Supply dynamics may come more to the fore

Demand has often outstripped supply, however systemic price increases have not followed. This is due to an abundance of patient capital seeking a return and uncertainty on volumes fuelling an Insurer’s ‘fear of missing out’.

However, with the potential for single deals of £20bn+ in the next few years, higher average prices are possible as liability volumes materially outstrip asset origination for the first time – leading to an investment yield drag.

Insurers commonly hold 40-50% of their assets backing annuities in less liquid, higher yielding assets, passing the benefit onto customers through lower prices. If these assets are not available, Bulk Annuity prices could increase.

The origination of these assets is subject to its own supply and demand dynamics, including available resource for structuring, risk modelling and credit analysis. Sufficient scaling of the volume of assets required is challenging even with new insurers entering the market.

‘Solutions’ exist – such as greater overseas investment and asset (or funded) re-insurance – but such investments are not aligned to the priorities of the UK government / regulator.

Slightly higher prices may not dent demand; but there is always value in timing

A Risk Settlement strategy which runs hard at an arbitrary date requires luck to provide best value.

Instead, here at Isio, we champion setting a strategy with clear value metrics and levels of preparedness. Those who can be well prepared, timing agnostic and suitably hedged, can take advantage of short-term insurer demand and alignment to new asset purchases to get the best insurer pricing.

We would love to discuss how we have incorporated this thinking into our strategic risk settlement advice, please see the contact details at the end.

More resource, but nowhere near enough. Specialists have a unique skillset

Insurance and Risk Settlement are hugely attractive areas to forge a career, however the required capabilities are unique. Greater standardisation of deals (especially at the smaller end) has been good for efficiency but has arguably flattened the learning curve – meaning learning and talent development need to be at the forefront of insurer’s and adviser’s business strategies.

There are many excellent people operating in Risk Settlement, and we at Isio are fortunate to have many who saw the ‘birth’ of the market in 2006. We are also delighted to have welcomed our new colleagues from Deloitte to provide greater expertise and capacity. 

Value means more than just price.

In our next bite-sized market insight, Karen Gainsford will consider the current strain on Insurer on-boarding of increased deal volumes and what this means for your market strategy and choice of Insurance partner.